Why Should You Use a Cooperation Clause in Your Real Estate Contracts when Doing a 1031 Exchange
A 1031 Exchange is a great tool for real estate investors who are looking to defer their capital gains taxes. However, there are a few things you should know before you try to do one. This includes the importance of a cooperation clause.
Key Takeaways
- A 1031 exchange must be set up from the very start of a real estate transaction — it can’t be added after the property has already sold.
- A Qualified Intermediary is required to complete a 1031 exchange and should be engaged before signing a listing agreement or sale contract.
- Including a Cooperation Clause in the sale contract discloses to the buyer that the transaction is part of a 1031 exchange.
- The Cooperation Clause requires the buyer to sign additional closing documents but places no added cost or liability on them.
- A Cooperation Clause is especially useful in states whose standard sale agreement doesn’t already include a place to note 1031 exchange participation.
First, you must have a qualified intermediary in order to complete the exchange. Second, you must take steps to engage in a 1031 Exchange from the very start of your real estate transaction. You can’t just sell your property and decide to utilize a 1031 Exchange “down the road.”
Part of ensuring this happens is disclosing that your property will be part of a 1031 Exchange in your listing agreements and when you sign a contract with a potential buyer. One helpful strategy to ensure this is done (and done correctly) is to include a Cooperation Clause in your contract. This is especially important to consider if your state’s standard agreement of sale does not have a place on it to indicate that your property is part of a 1031 Exchange.
What Is a Cooperation Clause?
Essentially, the Cooperation Clause informs the other party of the transaction that you are doing a 1031 Exchange. It explains what that means for them as the buyer. The language we frequently draft lets the buyer know that they will be required to sign some extra documents at closing. However, it doesn’t cost anything or place any additional liability on the buyer. They are simply required to take these steps to facilitate the transaction.
If you would like to see a sample of the specific language we use in our Cooperation Clause, please email info@wealthbuilder1031.com and we’d be happy to send you a copy.
Back to Step One
At the beginning of this post, we mentioned that the very first step of starting a 1031 Exchange is to hire a qualified intermediary who can assist you with the process. At WealthBuilder 1031 Exchange, we are able to serve as Qualified Intermediaries for clients anywhere in the United States. If you’d like to learn more about how we can assist you with your transaction, please contact us at (888) 508-1901.
Disclaimer: This content is for informational purposes only and does not constitute legal or tax advice. Consult your tax advisor or attorney for advice specific to your situation.
Chris Peterson — Texas Licensed Attorney & Founder, WealthBuilder 1031
Chris is the Owner and President of WealthBuilder 1031 and a licensed Texas attorney. He graduated from Wheaton College and the University of Texas School of Law and speaks regularly to realtors, accountants, and title companies about 1031 exchanges. Learn more →
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